My Top Stock for January

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The revolution is here. It's time to get on board or get left behind. LinkedIn (NAS: LNKD) is changing the way millions of professionals manage their careers -- and creating value for members, customers, and shareholders.

I believe LinkedIn has the makings of a multibagger. It's a great business selling at an attractive price, and I am buying shares for my Trends and Trades portfolio. Read on to find out more, and be sure to click the link at the end of the article to follow all of the action on Twitter.

The TNT way
At Trends and Trades, I am looking for stocks with explosive potential, companies that have:

  1. Transformational technologies that can change the world
  2. Nascent performance the market isn't expecting
  3. Talented management that will lead the way

Not only are TNT companies interesting and exciting, but they can create wealth for shareholders. And LinkedIn looks like a long-term winner.

Transformational technology
More than 135 million people have joined the LinkedIn platform. And it's not because of the job listings. Using LinkedIn, people can take charge of their careers: creating connections, gaining valuable insights, and doing so wherever they are. That's how LinkedIn sets itself apart from competitors like Monster Worldwide while trying to keep potential threats like Google at bay.

LinkedIn reminds me of Amazon.com (NAS: AMZN) in its early days. Many investors saw Amazon.com merely as an online bookstore. What Amazon.com really wanted to be was the greatest online retailing platform, able to sell whatever it wanted. LinkedIn wants to be the quintessential professional network, where p eople can not only find new jobs, but also find ways to be more productive and successful in their current ones.

LinkedIn's platform continues to resonate. Membership is growing fast, increasing 63% last quarter, or two new members per second! As more people join the network, the more valuable it becomes -- and the more revenue LinkedIn can generate by selling products and solutions to recruiters, enterprises, advertisers, and members.

Nascent performance
I can still hear my business school professor saying, "Strategy is all about value creation and value capture." LinkedIn has the creation part down. The company wants to capture value by generating revenue in three segments: hiring solutions, marketing solutions, and premium subscriptions.

Hiring solutions bring people to jobs and recruiters to people. Marketing solutions help businesses advertise their products and solutions to an engaged audience. Members sign up for premium subscriptions to stay on top of all the relevant news and trends in the professional fields. Over the last 12 months, LinkedIn generated $436 million of revenue, up 117%. Yes, that's right: 117% growth. Here's how the revenue streams looked in the third quarter.

Segment

Revenue

% of Total

Growth

Hiring solutions$71 million51%160%
Marketing solutions$40 million29%113%
Premium subscriptions$28 million20%81%

Source: LinkedIn's Q3 2011 conference call.

And the company is just getting started. LinkedIn continues to invest more than 20% of its sales in R&D to improve products like LinkedIn Recruiter and to roll out new ones such as Talent Pipeline. Reinvesting capital to support its members and customers is how LinkedIn will capture a portion of the enormous value it creates.

Talented management
"Reid was always interested in creating communities."

Peter Thiel, PayPal co-founder and venture capital, was talking about LinkedIn co-founder and executive chairman Reid Hoffman. For Hoffman, a Silicon Valley legend, LinkedIn is the culmination of a dream to be able to have an impact on society on a meaningful scale.

Hoffman splits his time between venture capital firm Greylock Partners and LinkedIn, focusing on product and company strategy. Hoffman believes the Internet is changing and that companies that can collect and use data creatively have an advantage -- a big reason that Hoffman owns 19.4% of LinkedIn's shares and that Greylock has investments in LinkedIn, Facebook, and Groupon.

CEO Jeff Weiner is the man tasked with bringing the vision to life. A former executive at Yahoo!, Weiner took the reins in June 2009. Since then, membership has more than doubled, corporate customers rose from 1,300 to 7,400, and quarterly revenue increased from $30 million to $139 million. Hoffman and Weiner complement each other well and have what it takes to propel LinkedIn forward.

Risk/reward
As I mentioned earlier, I think the stock is very attractive. But I don't think the market expects the trend to continue. The stock price is down almost 40% from its recent high of $110 per share. Management estimates its total addressable market is $52 billion: $27 billion from staffing and $25 billion in business-to-business advertising. If LinkedIn can average 50% growth over the next three years, a reasonable expectation given its favorable position, and increase its adjusted EBITDA margin from 12.2% to its goal of 30% using its economies of scale, the company could be worth $15 billion to $18 billion, or 2.2 to 2.6 times its current value. That's a nice return.

It's true that LinkedIn is a disruptive technology in professional networking. But success is not guaranteed. If member engagement falls or management is unable to effectively monetize the network, the market will give LinkedIn a pink slip.

The bottom line
LinkedIn has brought career management to the cloud, and people are flocking to the platform. Management remains focused on giving members what they need to manage their careers while offering customers access to an engaged audience. The company continues to generate more and more cash, and the stock price is attractive. I'll support the revolution by buying shares. I love my job.

There's plenty more action to come. And the best way to stay on top of it is to click here to follow along via Twitter.

At the time this article was published David Meier is an associate advisor for Million Dollar Portfolio. He does not own shares of any of the companies mentioned. David Gardner owns shares of Amazon.com and Google. The Motley Fool owns shares of Google and Amazon.com. Motley Fool newsletter services have recommended buying shares of Google and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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